Russia plans stricter punishment for money laundering

Russia plans to radically mount the fight against financial criminals who boost capital exodus from the country. Experts however fear the new rules may also affect law-abiding businessmen and whole industries.

Russian authorities decided to mount the fight against unlawful financial transactions in early 2012 and President Dmitry Medvedev appointed First Deputy Prime Minister Viktor Zubkov in charge of the effort.

Zubkov soon reported that money laundering abroad and cash-out inside Russia withdrew close to four percent of the GDP from the country. He described it as a national security threat.

The Bank of Russia estimated that close to one trillion rubles (US$ 33 billion) out of 2.5 trillion of net capital outflow in 2011 had “signs of laundering” through fly-by-night firms. Another one trillion rubles were cashed with “signs of domestic law violations.”

The fly-by-night firms mostly operate in tax, customs, and banking spheres and on the financial market, according to Zubkov.

This week the Federal Service for Financial Monitoring (Rosfinmonitoring) will submit to the government the first package of legislative amendments which reduce ten times the minimal money laundering threshold which envisages criminal punishment. So far major money laundering deals punished by a fine of 300 thousand rubles (US$ 10,000) and a four-year prison term begin from six million rubles (US$ 200 thousand). The amendments reduce the amount to 600,000 rubles and envisage a fine of 200,000 rubles or a two-year prison term.

Rosfinmonitoring said mostly budget money and funds of state companies and corporations are laundered both in banks and on the stock market.

It said state corporations are surrounded by a web of fly-by-night companies often affiliated with administrators of funds. They pump money into ‘shadow” turnover and legalize it as private enterprise funds. The violations are mostly reported in housing and communal industry, power engineering, construction, goal-oriented and investment programs, and military-defense complex.

The Russian stock market offers wide possibilities for operations with “dirty” money and its instruments are actively used for cash-out and money transfer to non-residents. Rosfinmonitoring said nearly 7.5 billion dollars were transferred to the accounts of offshore companies in foreign banks through stock market instruments in the past three years.

The financial watchdog proposes to monitor all deals worth 600 thousand rubles or equivalent in foreign currency (US$ 20,000). It estimated there are forty types of dubious transactions, in particular, depositing and withdrawing cash from an account of a legal entity, purchase and sale of foreign currency by a private individual, cash purchase of securities by a private individual, depositing gemstones and jewelry in pawnshops, providing and obtaining interest-free loans.

Experts see both pros and cons in the initiative.

“I believe it will decrease the number of financial crimes as people would hardly risk their freedom. Ten thousand dollars or 300 thousand rubles comprise a big amount abroad and their laundering is fraught with major punishment. It is good that Russia has finally comprehended it,” Director General of Blagodat Securities Investment Company Vsevolod Chashchin told Urainformbureau news agency.

However Alexander Yermolenko from FBK-Pravo consultancy fears the initiative may also complicate the life of honest businessmen and ordinary citizens in general. He told New Region agency Rosfinmonitoring does not distinguish between money laundering and tax dodging. “They call money laundering any unlawful activity,” he said.

“Rosfinmonitoring is witch hunting. As a result it affects ordinary businessmen rather than criminal elements. The fuss disorganizes the market and people escape offshore even more. Such changes trigger a reverse effect,” he said.

“Rosfinmonitoring was fast to draft a lawbill which actually eliminates bank secrecy and gives expanded powers to tax authorities and at the same time complicates the registration of a new business,” NEWSru.com economic writer Maxim Blant said. “All efforts of the past years to encourage small and medium businesses and facilitate private enterprise can be forgotten now.”

Blant said Zubkov had identified yet another “nest of vipers” for money laundering and corruption – the Russian stock market. “He did not dare eliminate it but his initiatives about stricter control and regulation and higher requirements to market participants will make their life less comfortable,” he said.

However Blant agreed the initiatives will make people “stop stealing for a week or two until a new scheme is invented on and outside the stock market. Is it for the sake of two weeks that the deputy prime minister plans to deal a blow to a whole sector of economy which will hardly recover from it?” he asked.

“First and foremost, they have to make the climate in the country more comfortable for business. In that case the instruments which companies use to increase their comfort will be no longer necessary,” Anton Danilov-Danilyan from Business Russia Association told Vedomosti daily. Stricter administrative regulation is a secondary measure while excessive powers of officials can be detrimental to law-abiding companies, he said.